Geoffrey Makhubo MMC: Finance

1. Geoffrey Makhubo MMC: Finance II World Forum of Local Economic Development

2. Agenda Overview of the City of Johannesburg 1 2 Challenges and Responses 3 • Financing Local Government • Key consideration 4 • Conclusions 5 6 • Questions

3. OVERVIEW OF THE CITY OF JOHANNESBURG

4. Overview of the City The City has set its sights on becoming a World-Class African city in which all residents can enjoy the fruits of economic growth and job creation and lead prosperous and healthy lives

5. Key stats • Population of Joburg - 4.6 million • Population of Gauteng – 12million • SA population 53million • Joburg % of provincial population – 38% • Joburg % of national population – 8.7% • CoJ has least Not Economically Active (NEC) at 26.5% in 2011 • CoJ has highest proportion of the employed working age population (52.6% in 2011) • Gauteng most populated province with over 12million people, followed by KZN with over 10million people as per Stats SA (2012)

6. CHALLENGES & RESPONSES

7. Challenges for Local Economic Development • Population growth rate of 35% from 2001 to 2011 • Youth bulge accompanied by youth unemployment at 31.5% • Spatial divide stemming from apartheid spatial planning • Structural change of the Joburg economy, previously a mining and now dominated by services industry • Currently mining contributes 2.5% to economic activity • Shift from primary industries to secondary industries has resulted in huge demand for new infrastructure • Ageing and Aged infrastructure

8. Responses………….` • Stitch the City to correct spatial divisions through “Corridors of Freedom” • Build a united city • Invest in social infrastructure and renew old infrastructure • Built resilient infrastructure to withstand the effects of climate change • Invest in Economic Infrastructure • Creating employment through SMMEs • Exploring Partnerships

9. Medium Term Capital : 2013 - 2016 11 034 462 • COJ will roll out $11 billion infrastructure over the next 10 years • Total capex roll out by 2016 will amount to $3.3 billion

10. CAPEX Financing - next 3 years

11. Revenue make-up: 2013/2014

12. FINANCING LOCAL GOVERNEMNT

13. BACKGROUND • 2003: Research trip undertaken to Mexico • 2003: The idea was re-visited • April 2004: COJ01 issued (Redeemed April 2010) • September 2004: COJ02 issued • April 2005: COJ03 issued ( Redeemed April 2013) plus Launch of Domestic Medium Term Programme (DMTN) • June 2006: COJ04 issued and established a Debt Redemption Fund (Sinking Fund) • September 2007: Jozibond (Retail Bond) issued • June 2008: COJ05 issued • December 2008: COJ06 issued • March 2011: COJ07 issued

14. Creating and Enabling Local Financing Environment • South Africa has a well established deep debt capital market • Institutional investors dominate the market • Enabling legislative environment made it possible for municipalities to access these markets

15. Strong legal & governance framework • Underlying the municipal debt market is the strength of the existing governance: • Constitution of RSA (1996) • Municipal Structures Act (1998) • Municipal Systems Act (2000) • Municipal Finance Management Act (2003) • Securities Services Act Very important to note: A strong legal framework provides comfort for investors due to the: • Depth of legal system • Enforceability of agreements • Comprehensively regulated financial markets • Municipalities required to comply strictly to legalframework

16. Diversifying Capital Financing 3 years ago Current • City’s main lending sources : bonds / banks / DFIs • City exploring other forms of funding as it increases capex spending over the next 10 yrs.

17. Diversification into Retail Bond Market (JOZI Bonds) The City’s Vision and Objectives  Develop a retail savings product in partnership with the City’s residents which is available to all LSMs with a no-cost option • The City has successfully set up a robust, sustainable, sophisticated yet user-friendly platform for investment in all three tradable instruments by any person wishing to invest $100 through two distribution arms (SAPO and stockbrokers) at little or no cost to investors. • No cost to investors purchasing JOZIBONDS through SAPO if held to maturity. • The product offered the City an opportunity to partner with communities in funding local infrastructure • Through pursuing engaged and active citizenry, communities were able to be part of developing their own City by investing in retail bonds

18. Export Credit Agency (ECA)Financing for BRT

19. Export Credit Agency (ECA)Financing for BRT……

20. PPPs seem viable: Landfill Gas Project • Initiated in 2007 • Contract signed with EnerG Systems Joburg over 20 years to implement the project at no cost to the City • Feasibility study was completed on 6 sites • 5 were found to have enough gas to generate electricity: • Robinson Deep • Marie Louise • Goudkoppies • Linbro Park • Ennerdale • Project costs estimated to be R250 million

21. KEY CONSIDERATIONS

22. PRE-CONDITIONS FOR A SUCCESSFUL BOND ISSUANCE • Sound legal framework • Sound public policies • Credit rating • Ability to manage the bond issue: payment of coupons and final settlements • Good long-term strategy & planning e.g. economic development strategy and long term capital development plans • Sound and stable leadership & management • Politicians & officials • Know your problems, have a plan to deal with them, and show some progress • Financial Sustainability

23. Parties involved in bond issuance Issuer Municipality / Legal entity Council Resolves that municipality may incur long-term debt Arranger Arranges the programme on behalf of the issuer Advisor Advises issuer on issuance requirements and regulations Agent Performs administrative functions relating to the note (issuing and paying) Dealer Sells/ places the note in the market. The issuer decides how many dealers (banks) they want to have on the programme Sponsoring Member For BESA and JSE, it is usually the arranger LawyersFor the issuer – review documentation and issue comfort opinion For the arranger and dealers – draft documentation and issue comfort opinion Auditor Issuer’s auditor checks financial disclosure and confirms compliance (statutory requirements)

24. Considerations Pre-Issuance • Appetite • How much appetite is there in the market • Structure: Vanilla vs. Enhanced • Tenure: What range? • Issue size • Disparity in market pricing • Leveraging on pricing of bank loans • Timing (When to come to the market): • Inflation outlook • Interest rate outlook • Investors searching for yields

25. CONCLUSION

26. Strategic results achieved • Initiated the municipal bond market • Established yield curve for COJ • Established reputation and track record in the market • Diversified funding sources • The City has numerous new investors: • Private sector institutional lenders (asset managers, mutual funds, pension funds) • Retail investors • Reduced the average cost of borrowing on a weighted basis • Restructured existing debt profile • interest savings of over R20 m per annum • Profile shifted outwards • Repaid expense debt • Release of escrow investments that were linked to loans • Positioned ourselves for higher CAPEX going forward

27. Questions & Answers Thank You